Hey Shareholders, Capex Means Cash in the Cloud!

Om’s post about Google’s soaring infrastructure spending got me thinking about the hypocrisy in the way we assess web companies’ decisions to splurge on the very equipment that makes them tick. Startups are either expected to or praised for spending on more infrastructure, while public companies feel the wrath of financial analysts when they do the same.

Users come to love services like Facebook and Twitter (even Foursquare) so much that it resembles a national crisis among some circles when one of their sites goes down for a few hours. How do they try to avoid these occurrences in the future? Well, they spend some of those millions improving their physical infrastructures and creating specialized software to address unique needs. Greenpeace aside, I don’t recall hearing any complaints about Facebook’s first data center, nor about Twitter’s planned data center, and these companies aren’t even making money.

So why is it that financial analysts and shareholders get so up in arms when massive public web companies like Amazon or Google embark on spending kicks? After all, they bring in billions in revenue each year, and Google is responsible for more web traffic than Facebook and Twitter combined. Because it detracts from near-term profitability, that’s why. Om calls such analysts “idiots and short-term thinkers,” and he’s spot-on with his analysis of the situation.

Imagine if Google’s search engine, or its paid Google Apps service, went down as frequently as Twitter. What about Amazon Web Services, which hosts a good number of popular web sites and relatively important enterprise applications? What if these companies never rolled out new services because that would require spending more money on infrastructure? The answer is that they wouldn’t be too popular for too long. Companies delivering services via the web have to spend money – on infrastructure – to make money.

I can only imagine the number of cloud computing providers who’d love to have the problem of needing to scale to meet demand, and actually having the cash to do so. That day will never come if they don’t do infrastructure right in the first place.

When we’re talking about companies for which millions today might mean billions tomorrow, it might behoove shareholders and analysts to lighten up a little bit on the bottom line.